As we delve deeper into August 2023, financial experts and stock market enthusiasts have their eyes glued to the indexes, pondering a crucial question: Are we about to witness the historic August doldrums?
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August’s Historical Context
Historical trends indicate that August hasn’t been the best month for stocks. Data from Stock Trader’s Almanac reveals August’s less-than-stellar track record for the S&P 500, Nasdaq, and Dow Jones Industrial Average. Considering the market’s strong performance this year, is it prudent to expect a deviation from this historical narrative? Or, given the current stock rally and weak seasonal patterns, should we anticipate a market pullback?
A Brief Recap: The Market’s Journey So Far
- Bullish Behemoths: Tech stocks like Microsoft, Oracle, and Palantir have significantly buoyed the market, enticing investors and triggering optimism.
- Echoes of the Past: The market’s stellar performance up until July contrasts with its recent slowdown. From March to July, the S&P 500 skyrocketed by 18%, with the Nasdaq notching an even more impressive 30% increase.
- Banking Blues: Moody’s rating cuts on small and mid-sized banks nudged U.S. stocks into a decline, with the Nasdaq dropping 0.8%.
What Does August Hold?
- Pullback or Pause: Early signs from August 2023 suggest a potential slowdown, with the Nasdaq and S&P 500 down 2% and the Dow down 1%.
- The Treasury Tangle: A 2023 high of 4.12% in the 10-year Treasury yield, primarily a result of the US credit rating downgrade by Fitch, is exerting pressure on growth and tech stocks.
- Tech Turbulence: The initial tech-focused rally is now broadening. However, this expansion and the pressure on tech giants might lead to subdued market indexes.
Are these indicators a mere blip in the market’s journey, or do they herald a more significant downturn?
Gazing into the Crystal Ball: Future Prospects
The backdrop for the financial markets remains largely positive, with improved fundamentals concerning inflation, interest rates, and the broader economy. This is underscored by JP Morgan‘s Mid-Year Outlook for 2023, which seeks to provide insights into potential market trends for the latter half of the year. Simultaneously, BlackRock’s outlook emphasizes the evolving landscape post-COVID, marked by higher valuations, inflation, and interest rates.
To Dive or To Wade?
Given the potential for a 5% – 10% correction in August and September, should investors adopt a cautious approach or remain optimistic? Considering the underlying strengths of the market, many financial analysts posit that any potential dip in the short term will unlikely affect the broader trajectory of a burgeoning bull market.
In conclusion, while August might historically be a somber month for stocks, the overarching fundamentals and the market’s recent performance suggest a brighter horizon. However, investors are reminded to remain vigilant, recalibrate their portfolios, and stay informed. The stock market, after all, thrives on its unpredictability.
Inflation and Economic Trends:
- Consumer Prices in July:
- Rose by 3.2% annually, marking the first increase in 13 months.
- Core CPI (excluding food & energy) dropped slightly to 4.7% for the year, from June’s 4.8%.
- Wholesale Price Inflation:
- The Producer Price Index (PPI) surged to 0.8% annually, surpassing the 0.7% estimate and the previous 0.2%.
- Core PPI (excluding food and energy) remained stable at 2.4% for the year.
Banking Sector Movements:
- Moody’s Downgrades:
- Ratings for 10 U.S. banks were cut, including M&T Bank, Pinnacle Financial, and Webster Financial.
- BNY Mellon, U.S. Bancorp, and State Street are under review for potential downgrades.
- Downgrades can impact investor trust, leading to potential stock value drops and changes in the investment landscape.
Consumer Debt & Spending Patterns:
- Credit Card Debt:
- Balances crossed the $1T mark for the first time, with a $45B rise in Q2.
- 30-day delinquencies surged to 7.2%, highest since Q1 of 2012.
- Higher debt can indicate increased consumer spending, but rising delinquencies suggest potential economic strain, impacting the retail and banking sectors.
- Disney Movements:
- ESPN’s new sportsbook launch in collaboration with Penn: Deal includes a $1.5B cash payment from Penn over 10 years and $500M in warrants for ESPN.
- Disney+ subscription cost increased by 20-27%, acknowledging a “challenging environment”.
Global Overview:
- China:
- Double-digit decrease in exports (14.5%) and imports (12.4%) in July.
- Entering deflation with a 0.3% drop in consumer prices in July, hinting at global economic implications.
- US-China Relations
- Biden restricts specific tech investments in China. Notification is needed for other tech sectors.
- Italy:
- A 40% levy was introduced on bank profits from high-interest rates, impacting nearly 19% of the annual banking system’s net income.
- UK:
- Q2 growth was led by household consumption and manufacturing, outpacing Q1’s 0.1% growth.
- Saudi Arabia:
- Aramco’s profits fall by 40% due to declining hydrocarbon prices.
- Tuesday, Retail Sales (MoM) (July)
- Wednesday, Building Permits (July)
Consumer Insights
With the conclusion of the earnings season, all eyes are now on the major retail giants as they reveal their second-quarter results. Big players like Walmart, Target, Home Depot, TJX Companies, and Ross Stores are lined up to present their reports. These outcomes will serve as an important gauge of household financial health and patterns of consumer expenditure. As analysts have projected subdued expectations for this earnings cycle, investors are particularly eager to hear these retailers’ perspectives on profit margins, stock levels, and forecasts for the upcoming months.
US Market Updates
In alignment with the retail focus, we anticipate the release of the latest retail sales data on Tuesday. The numbers for July are projected to outshine those of the previous month. Also on the agenda is the manufacturing data roundup for this week, spotlighting reports from the Empire State and Philly Fed manufacturing indexes. Both are forecasted to reflect an ongoing dip in economic activity due to sustained diminishing demand.
Federal Reserve Watch
Switching tracks, the financial community is eagerly awaiting the release of minutes from the Federal Reserve’s July policy meeting. Following a rate hold in June, the Fed opted to push up rates, setting the benchmark rate at 5.25%. The specifics of these minutes will be combed through for any hints of growing disparities in the opinions of Fed officials about the central bank’s future strategies. As the month progresses, attention will pivot to Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Economic Policy Symposium 2023, set for August 24-26.
International Focus: UK & China
Across the pond in Europe, the spotlight will be on the U.K.’s inflation figures for July, slated for a Wednesday release. The numbers for June pleasantly surprised many with an unforeseen decline. However, the ongoing challenge for the U.K. is managing soaring inflation rates and preventing them from becoming entrenched. Concurrently, upcoming economic reports from China will offer a deeper understanding of its domestic economic landscape, especially given the prevailing deflationary wave. The retail sales and industrial production statistics from China are bound to draw the most interest, illuminating the state of consumer purchasing and factory operations.
Last week in the bond market, there were several key developments. Following a hint from a Federal Reserve official regarding the possibility of prolonged higher interest rates to manage inflation, Treasury yields saw a decline. The weekly fixed-income landscape was mixed. Spread sectors such as preferreds, ABS, and emerging markets recorded positive excess returns. However, there were negative total returns in Treasuries, agencies, taxable munis, and a few other sectors. Municipal bond yields witnessed an uptick, influenced by a significant influx of new issue supply combined with notable outflows.
Additionally, 10-year U.S. Treasury yields experienced a rise, propelled by strong economic data and a credit rating downgrade. Despite the unexpected timing of this downgrade, the market is not anticipating any significant shifts in investor behavior.
Another noteworthy development was the unanticipated rise in the Producer Price Index (PPI). This surge, predominantly driven by service prices, led to an escalation in government bond yields. Moreover, earlier in the month, two-year and ten-year Treasury yields underwent a significant increase, partially attributed to anticipated rate hikes from global central banks, including the Federal Reserve. The overarching sentiment in the bond market seems to be largely shaped by prevailing expectations around inflation, potential actions of the Federal Reserve, and various other economic indicators.
Oil & Energy
Oil prices continue their rise, buoyed by recent predictions from OPEC. The consortium forecasts a tightening market in the latter half of the year, anticipating a global demand increase of 2.25 million barrels daily in the upcoming year, driven by robust economic expansion. Despite this, Saudi Arabia remains committed to strict production caps. In contrast, the International Energy Agency has adjusted its global demand growth projections to a 1 million barrel daily increase in 2024, a slight decrease from its prior 1.15 million. The agency expresses concerns over potential rate hike impacts on the global economy and emphasizes China’s pivotal role, predicted to contribute to over 70% of next year’s demand growth. Simply put, if China faces economic challenges, global oil demand growth could be jeopardized. Currently, European Brent crude trades near its annual high at $86.40 per barrel, with US WTI not far behind at $82.50.
The industrial metals sector remains unpredictable, heavily influenced by China’s economic data. Although metal production shows an uptrend, reflecting recent data on copper cathode outputs, there are concerns about China’s potential move towards deflation due to declining consumer and producer prices. Consequently, copper prices dropped this week on the LME, reaching $8420 per metric ton. Nickel prices also decreased to $20220, while aluminum and zinc remained steady at $2160 and $2480, respectively. On the precious metals front, gold faced pressures from rising bond yields, finishing the week at a decreased value of $1918.
Over the past week, the cryptocurrency market witnessed notable volatility. Bitcoin’s price dipped below $29,400, reacting to US CPI data, while altcoins like Shiba Inu and Solana observed up to 3% surges. The SEC has been active, settling with Bittrex over unregistered operations and intervening in a Utah company’s crypto fraud scheme. The U.S. regulatory landscape for crypto remains fragmented, with forthcoming legislation announced by Rep. Patrick McHenry. Amidst regulatory scrutiny, major exchanges like Coinbase and Binance face legal challenges. Additionally, global events such as the World Blockchain Summit in Singapore and Munich provided platforms for crypto discussions and innovation.
